- Interventionist strategies are put in place by governments to correct the failings of the free market & promote the welfare/development of its citizens
Interventionist Strategies
| Human capital |
Protectionism |
Managed exchange rates |
Policies aimed at developing human capital raise the potential output of the economy which leads to an increase in income
|
This can intervene in natural market forces which lower wage rates. Protecting employees can lead to higher levels of income |
In a floating exchange rate mechanism, rising exports will lead to currency appreciation which, in time, will lead to a slowdown or fall in exports. Managing currency prevents appreciation & a slowdown in exports leading to long periods of growing income
|
| Infrastructure |
Joint ventures |
Buffer Stocks |
Developing infrastructure reduces the cost of business & makes economic activity easier. This increases FDI, output, employment & income
|
Some countries (e.g. India) block foreign ownership of firms (FDI). Joint ventures (JV's) are a way that firms can get around that. JV's can increase trade, output, employment & incomes e.g Tata Starbucks allows Starbucks to sell their product through an Indian global steel giant, Tata
|
This is explained in more detail below. Price stability ensures income stability. It also results in excess production which increases levels of employment. It was used extensively in Europe post second world war (Common Agricultural Policy) & is still used extensively in different markets in India, Thailand (rice), Vietnam, Indonesia (rice & coal)
|
Buffer Stock Schemes
- Buffer stocks are created when the government buys up supplies of agricultural products when harvests are plentiful, stores them - & then sells them when supplies are low
- It aims to support agricultural producers, consumers & stabilise the market price of agricultural products
- While doing good, they create several problems, including
- Storage is expensive
- Transport to & from storage is expensive
- It is difficult to analyse & control market forces
- It requires all producers to participate honestly in the scheme e.g. producers in Vietnam have been caught importing cheap rice from Thailand & then selling i to the government at a profit in the buffer stock scheme
A buffer stock scheme for rice in Vietnam with P2 as the floor & P3 as the ceiling
Diagram Explanation
- The Vietnamese government has set a price ceiling (maximum price) & price floor (minimum price) in the market for rice
- The equilibrium is initially at P1Q1
- If the price of rice drops below P2, the government will purchase large quantities & store it (FG)
- This will reduce market supply, preventing the price from falling below the minimum price (P2)
- If the price of rice rises above P3, the government releases it from storage (AB) & sells the rice
- This increases market supply & ensures that the price does not rise above the ceiling price
